There Is No Alternative? That’s the Dumbest Thing I Ever Heard
Dr. William Gray, the estimable Colorado State University professor who is widely considered one of a handful of top national authorities on tropical weather prediction, just released his team's first forecast for the 2013 Atlantic hurricane season. This year's hurricane season, which begins June 1, will be above average, calling for 18 named storms during the hurricane season, nine of which are expected to become hurricanes and four of those major hurricanes, meaning they will reach category three status or higher.
There is another hurricane that has nothing to do with the weather that I want to warn you about. It is hurricane “TINA.” All my life I’ve been hearing this kind of stockbroker-talk from the side of our business that needs to keep their clients fully invested in order to keep them buying new ideas. TINA stands for “There Is No Alternative!”
This is truly one of the more dangerous investing hurricanes out there. The logic at first seems to withstand scrutiny; after all, who can get by on what CDs, Treasuries and many corporate bonds pay these days? And gold? Did you see the breadth and depth of that decline this month? (Gold has recovered somewhat. Gold stocks? Not so much.) So if CDs, Treasuries, other bonds and precious metals are sure paths to mediocrity or worse, TINA seems to make sense. Except that…
There are always alternatives. There are long/short mutual funds. There are bear funds. There are inverse ETFs. There are convertible bonds that are depressed because of the sector they are in that offer much larger returns. There are floating rate (senior loan) funds, ETFs and closed-end funds. There are ETFs and funds that use a mechanical trading strategy that ensure only small losses and automatic re-entry at good prices. All these are available as tools in our toolbox for those inevitable periods when the market corrects.
If any of the salesmen selling TINA had ever bothered to look at any historical market chart from any time frame of any duration, they might have noticed that the market “fluctuates.” TINA is not just buy and hold – it is buy, buy, buy and buy more until some stockbroker needs new tires for his leased Mercedes and then it’s SWITYWTGSE…SYCBSE/K. (Sell What I Told You Was The Greatest Stock Ever…So You Can Buy Something Else/Ka-ching!)
“There Is No Alternative!” presumes that no one will place their money in any kind of alternative other than common stocks, that no one would rather get 3% from a bond rather than lose 30% in the market, and that no one is concerned enough about a market that rises in the face of declining markets everywhere else to put their money in a coffee can on the backyard. It also ignores all the contrarians who choose to buy that which is cheap and not that which is dear.
All bull markets climb a wall of worry, but the TINA devotees presume that we are already in a new bull market. We may well be — or we may not. Here are some excerpts from a recent note I sent exclusively to our Stanford Wealth Management clients on April 16, the Monday gold completed a two-day plunge of $204 an ounce. I titled it “Gold plunges. Could the same thing happen to stocks?”
“...What's next? For gold, I imagine we'll see a dead cat bounce, but I think it will take time for any real recovery. I am now concerned that even Royal Gold, Silver Wheaton, Franco Nevada and Sandstorm, the gold miners’ financiers, will see little stock upside in the short to intermediate term as the miners they finance are forced by lower gold prices to shutter mines, lay off employees, and slash capex (capital expenditure) budgets.
“How about stocks? I think they'll recover from the 266 points lost this week, at least for the short term that encompasses this month's earnings releases. It was the plunge in gold and the fear that the cowardly, heinous bombing at the Boston Marathon might have been the beginning of something bigger that caused the market to fall. In the intermediate term, however, if housing doesn't roar ahead and more jobs aren't created by the private sector, it is likely to be a long hot summer. That's why we have kept a good position in bond, balanced and long/short funds and ETFs.
“Longer term, which is getting closer every day, nothing has changed in our outlook. [I am convinced that we] are either in the first ratchet up, or more likely near the very beginning, of a major secular bull market that, with 120 years of market history as our guide, should last from 10 to 17 years. By being cautious now via our bond, balanced and long/short positioning, I am certain we can weather any long hot summer and then be in the best position to buy blue chips at prices currently reserved for far lesser firms.”
Please notice my reference to long/short, bond and balanced funds and ETFs. So what can you expect for the next couple of quarters? If the market does retrench, I don’t think it will be a big swooping decline, but rather a water torture of small declines that, short term, sap investor enthusiasm. And that would give us the time to reallocate by buying when no one else is doing so. Markets that decline slowly (typically giving up 1-3% a month, just enough to keep the TINA shills saying. “Buy the Correction! Buy the Correction!”) give us time to reallocate in an orderly manner. Signs that this is happening include seeing an inverted yield curve, a market that stands alone as others fall (like the US markets now while others pull back,) a decline of the indexes below their 200-day moving average, with little bursts of lower highs toward it and lower lows away from it, and the continued ticking off of our trailing stops.
I would like nothing better than to see the market take off from here and give us all another of those wonderful up-32% years we used to see, but if I am to do my job well I cannot invest for you or myself for the market I’d like to see, but for the market that is. I am convinced we’ll see one of those up-32% markets soon, however. The first year or two of every secular bull market are usually the most explosive.
But first we may have to climb out of a slow decline caused by such factors as a slowing home-selling market (new home sales had the biggest decline in two years in February). One measure of consumer confidence inexplicably fell from 68 in February to 59.7 in March (okay, maybe explicable if they saw the lower home sales!), the other fell to a nine-month low. As consumer confidence waned, retail sales had the biggest decline in nine months. Job creation has been punk at best. The ISM Manufacturing Index fell for the third straight month. Permits for homebuilding fell 3.9%. And oil prices are down, presaging lower usage as the rest of the world’s economies pull back. This anomaly of standing alone is not, in this case, reason for pride — when the EU, China, India, Brazil and the rest of the emerging markets, and the commodity producers like Russia are all trending down, foreshadowing belt tightening and protectionism, I’m not sure which markets U.S. multinationals plan to increase their sales in. And while the current earnings picture shows ever-leaner companies, their top line — revenue growth — is looking weak.
Still think There Is No Alternative but to stay fully invested all the time? If so, prepare to ride out “fluctuation,” some of which can be pretty severe. If not, you might consider the ideas in our most recent articles.